The type of dredging and construction contract is usually decided upon at an early phase of a project. Important tasks that must be completed in every construction process relate to:
- Building processes;
- Long-term management and maintenance.
The main participants in the construction process are the client (owner), the contractor, the advisor and/or consultant, the end-user and the financier. Depending on the chosen contract format, the role of each of these will be different. The main contract formats which are typically distinguished are:
- traditional contracts, with split responsibilities for each party;
- integrated contracts, whereby the contractor is involved in the design process;
- partnership or alliance contracts, whereby various tasks of the construction process are shared between client and contractor.
The contract format will definitely have a bearing on the risk profile for each party.
Traditional”client design” contract
In a traditional contract, the client (owner) is assisted by a specialist consultant for the planning
, design and construction of the project. Typically the consultant defines:
- the soil investigation and survey programmes;
- interprets the data and reports;
- makes an initial and detailed design of the project;
- provides a cost estimate;
- prepares the tender documents;
- assists in selecting the contractor;
- is often also the engineer during the construction.
Sometimes this last activity – the engineering – is contracted to another firm. This is not an ideal situation since, for the judgment of monitoring
results, a direct line with the original and responsible designer is more convenient and efficient.
The tender in a traditional contract includes detailed technical and contractual information upon which contractors base their bids. The tender procedure usually requires contractors to prove their ability to construct the works (technical bid). Once the contractors have gone through this selection procedure successfully, the project is usually favoured to the lowest bidder. The tender documents then form the basis of the contract between the client and the contractor.
Risk and risk allocation
Contractual risks are inherent to any contract and can be dealt with in a number of ways. The most ideal situation is a contract whereby risks are borne by the party who can best handle specific risks. Within a traditional contract, examples of risks normally born by the client are:
The risk of price increase of fuel
- The risk of the accuracy of the required fill volume.
The dredge and reclamation volume is usually paid based on a unit rate per cubic metre and according to the actual measurement of this volume. In a traditional contract the risk of the actual volume is borne by the client. In a lump-sum contract the risk of the dredge and reclamation volume is for the contractor;
- The risk of the accuracy of the soil information provided, upon which the contractors have based their bids.
Examples of risks for which contractors bear responsibility are:
- The interpretation of the provided soil information for both dredging and reclamation works;
- The selected work method;
- The planning of the works within the specified milestones.
This risk allocation emphasises the responsibility of the client to provide accurate soil information to enable contractors to define their work method and to make their cost assessments. If this information is inaccurate and “adverse soil conditions” are encountered, the results can be difficult for the client and the contractor.
Adverse soil conditions
The assessment of a project’s soil conditions is the most important factor to determine “dredgeability”, which influences the choice of suitable equipment, the production rates and the costs for the dredging works. The basic principle of adverse soil conditions, also called “adverse physical conditions” is whether or not they are foreseeable and whether or not there is a contract clause that will give the contractor the right to claim for additional time and money in case unforeseeable physical conditions occur. These are conditions which were not reasonably foreseeable by “an experienced contractor,” the term commonly used by FIDIC
Adverse soil conditions can have serious consequences for the work method and require:
- the deployment of additional equipment,
- a change of equipment and
- an extension of the construction period.
These changes may have huge cost consequences leading to claims and even to arbitration. A tenderer when analysing the site data needs to be assured that the data has been collected and prepared by a competent soil investigation company. An advantage of the traditional “client’s design contract” is that the client has full control over the design of the project.
Disadvantages of a traditional contract
Disadvantages of a traditional contract include the fact that the contractor’s experience and know-how is not implemented in the design, the work method and the planning of the construction. This may lead to higher costs and possible changes in the design and the planning during the execution of the works. This disadvantage may be avoided if the contractors are allowed to submit alternative bids which suit their equipment
, planning and work methods, leading to lower project costs. Work methods may however already be defined in the permit for executing the works and this may not allow for alternative work methods or constructions. In that case permission for an alternative work method or construction may not be granted or may be subject to a lengthy process.
A prerequisite for this “balance of risks” is that both parties, i.e., the client and the contractor, have professional knowledge/competencies in these specific areas.
Contractors may become involved with a project in several ways, depending on which functions (design – construct – finance – operate – maintenance) are integrated in the contract.
”Design and construct” contract
Most commonly used is the “design and construct contract” which calls upon the contractor’s knowledge and experience at an early stage (planning) of a project and gives the contractor responsibility for the design. Based their expertise, the contractor formulates the performance requirements and prepares the design using international standards and recommendations.
In this process the contractor may be assisted by an expert consultant. The soil investigation and surveys may be also conducted by the contractor. This would be the ideal situation because the risk of encountering adverse soil conditions is now fully borne by the contractor. However, for practical reasons – since this can hardly be conducted by all potential bidders -- the soil investigation and survey is often conducted under the responsibility of the client.
The advantages of a “design and construct” contract are:
- for the contractor, the work method and necessary equipment can be stipulated in the work permits, and in the planning and the construction of the project which normally leads to reduction of costs;
- for the client, the ability to draw on the contractor’s specialist knowledge regarding design disciplines in the preparation of the project will lead to cost-efficiency.
Disadvantages of a “design and construct” contract are:
- detailing of the functional requirements into performance requirements by the contractor may be a lengthy process;
- the client must have specialist knowledge in order to check and evaluate the work of the contractor;
- where more contractors are involved during the bidding procedure, all contractors have to go through this lengthy process with subsequently high tender preparation cost, which may not be fully retrieved from the client;
- the client is not fully in control of the resulting design. Once the design is conducted according to international standards and recommendations and the contractors are convinced of the ability to construct their design, the client can hardly reject the outcome of that process.
During execution the position of the client is restricted to checking on milestones defined in the contract. “Design and construct” contracts demand that the client has complete confidence in the professional standards of the contractor.
Partnership and alliance contracts
Partnering can also be the linking together of the client with one or more contractors that are engaged to assist the client with project development. This linking process is designed to set out the common aims and objectives of the partners, to establish the ground rules for working and to define the responsibilities and risks for each partner.
The objective is to foster a climate of mutually beneficial co-operation, where successful completion of the works within agreed timeframes and to agreed standards brings defined commercial benefits to all the parties. This is the so-called “win/win” situation.
The alliance contract is a joint venture between client and contractor. This type of partnership can be applicable to both traditional and integrated contract. In this type of contract the client and the contractor share one or more tasks in the process based on a “best for project” philosophy.
Best for project philosophy
The best-for-project approach means that costs and risks are shared according to a predetermined division. Several advantages are apparent in this arrangement:
- both parties share an interest in minimising risks and in finding ways for cost savings;
- the contractor is involved from the start (Early Contractor Involvement), which can shorten the total project implementation time since a number of activities can be executed in parallel instead of serially;
- the client can draw upon contractor’s know-how and experience to get the necessary environmental and other permits and licenses in place.
Based on the success of various recent projects which have been executed as alliance contracts, this type of contract is becoming a favoured as well as successful tool for the implementation of complex projects.